Part III --- Administrative, Miscellaneous, and Procedural

Weighted Average Interest Rates Update

Notice 2004-40

This notice provides guidance as to the corporate bond weighted average interest rate and
the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue
Code. In addition, it provides guidance as to the interest rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II), and the weighted average interest rate and permissible ranges of interest rates
based on the 30-year Treasury securities rate.

CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act
of 2004, provide that the interest rates used to calculate current liability and to determine the
required contribution under § 412(l) for plan years beginning in 2004 or 2005 must be within a
permissible range based on the weighted average of the rates of interest on amounts invested
conservatively in long term investment grade corporate bonds during the 4-year period ending on
the last day before the beginning of the plan year.

Notice 2004-34, 2004-18 I.R.B. 848, provides guidelines for determining the corporate bond
weighted average interest rate and the resulting permissible range of interest rates used to
calculate current liability. That notice establishes that the corporate bond weighted average is
based on the monthly composite corporate bond rate derived from designated corporate bond
indices.

The composite corporate bond rate for April 2004 is 5.86 percent. Pursuant to Notice 2004-
34, the Service has determined this rate as the average of the monthly yields for the included
corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years
beginning in the month shown below.

Corporate
For Plan Years Bond 90% to 100%
Beginning in: Weighted Permissible
Month Year Average Range

May 2004 6.36 5.73 to 6.36

30-YEAR TREASURY SECURITIES WEIGHTED AVERAGE INTEREST RATE

Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for
purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and
(2), as the annual rate of interest on 30-year Treasury securities for the month before the date of
distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-
1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the
annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month
in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

Section 404(a)(1) of the Code, as amended by the Pension Funding Equity Act of 2004,
permits an employer to elect to disregard subclause (II) of § 412(b)(5)(B)(ii) to determine the
maximum amount of the deduction allowed under § 404(a)(1).

The rate of interest on 30-year Treasury securities for April 2004 is 5.14 percent. Pursuant
to Notice 2002-26, 2002-1 C.B. 743, the Service has determined this rate as the monthly average of
the daily determination of yield on the 30-year Treasury bond maturing in February 2031.

The following 30-year Treasury rates were determined for the plan years beginning in the
month shown below.

30-Year
For Plan Years Treasury 90% to 105% 90% to 110%
Beginning in: Weighted Permissible Permissible
Month Year Average Range Range

May 2004 5.17 4.65 to 5.43 4.65 to 5.69

Drafting Information

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee
Plans, Tax Exempt and Government Entities Division. For further information regarding this notice,
please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a
toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through
Friday. Mr. Stern may be reached at 1-202-283-9703. Mr. Montanaro may be reached at 1-202-
283-9714. The telephone numbers in the preceding sentences are not toll-free.